In modern life, and especially after the pandemic, more and more people have multiple sources of income. As a result, there is often a lot of confusion about how the tax works on these various ‘streams’ of income.
So, heads up, here’s your need-to-know knowledge on tax and multiple income streams.
Let’s start with the basic ‘rule’
In the UK, if you are tax resident here, you need to pay tax on your worldwide income. Note, worldwide. If you have multiple income sources and have tax to pay, you will usually be required to register for a tax return.
It’s through this tax return that any payment (or overpayment!) of tax is handled each year.
Think of your income like a stack of books
Imagine your income builds up like a stack of books. Each extra source of income is another book added on top of the others. The total number of incomes sources is the total of all the “books”.
Here’s how it works in tax terms for a person with several sources of income:
- Day Job – this is their main employed job, for example, a teacher.
- Self Employed ‘Side Hustle’ – for example, some freelance tutoring online.
- Airbnb (Rental) – our teacher is renting out a large ‘shed’ at the bottom of their garden through Airbnb. This is taxed as rental income.
- Dividends – they receive dividend income from some shares they own in various stock market listed companies.
How income stacks up for tax
Following the tax rules, these incomes are stacked on top of each other, forming a total income for that person. However, various allowances can be applied to the different types of income. On your tax return, there are separate boxes and pages for each of these different types of income.
After deducting any allowances or reliefs, the remaining income is then taxed. Submitting your tax return will in turn produce a tax bill that accounts for all your income streams. Any tax you have paid already is then offset. So, you either need to pay the difference or relax and receive a refund!
In our teacher example, it’s likely this taxpayer would have paid tax in their teaching job via PAYE. So, when the overall tax bill is calculated, this amount is offset against their tax bill.
So how much tax will I pay on the different streams of income?
The tax due on the extra income varies depending on your overall earnings, and on the type of income.
Why the ‘stacks of books’ is a good thing to picture is that some of your income might end up being taxed more, based on how much you earn.
For example, in the 21/22 tax year, the ‘basic rate’ of income tax is 20%. This rate applies to the self-employed, employed and rental income in our teacher example, but only where their income is under £50,270 total per year. Anything over that amount is taxed at 40%, aka the ‘higher rate’ of tax.
If we said in the example the teacher income was £45,000, and the self-employed income £10,270, that gives a total of £55,270. Therefore, £5000 of our teacher’s income will be taxed at the 40% income tax rate.
Some income sources pay different rates. For example, dividends are only taxed at
- 7.5% in the basic rate
- 32.5% in the higher rate
However, they are always taxed as the last thing on the ‘stack’.
OK, but how does this affect my pay from my day job?
The common belief is that the tax you pay in your day job covers that income. Practically this is usually the outcome, but technically all of your income is going into one pot and getting taxed together. It just happens that because of the way the employment ‘PAYE (Pay As You Earn)’ system works, you have been deducted tax all year that is generally the correct amount for that income.
As a result, usually your regular job income is unaffected by the other income. Any extra tax due on your other sources of income is mopped up on a tax return.
After your initial first tax return with additional sources of income included, HM Revenue & Customs may adjust your tax code in your job PAYE to start to take more tax. They generally do this because they predict that you will earn the same amount again and would like to ensure they are going to get the tax due!
If you think this is incorrect (for example, some of your extra income was a one-off), you can phone HMRC and ask them not to adjust your tax code for that income.
If they have got it wrong and deducted too much tax, when the tax return calculates the tax bill and offsets the tax from your main job, you would get a refund from the tax return.
You mention tax allowances, like what?
In this example, there are several allowances that could be available (at the time of writing). These include:
- Personal Allowance – most people in the UK will have a personal allowance of £12,570 (21/22 tax year)
- Dividend Allowance – the first £2000 of dividends are tax free
- Rental Income (Airbnb in this example) – £1000 allowance, or possible ‘Rent a Room Relief’
- Self-employed income – the £1000 trading allowance might be of use
How and when to apply the various allowances is a key part of ensuring you only pay the tax due. If you are starting up a side business, a good place to start for more information of the trading allowance and other practical points would be our blog on the subject.
Got a side hustle (or two) and need help with your tax return?
If you’re new to multiple streams of income, or are not sure your current accountant is making the most of allowances, give us a call. We’re happy to help either with one-off advice, or save you time and money by becoming your new accountant.